PrefBlog

Ireland needs some green:

Treasuries rose while the cost to insure Irish government bonds jumped to a record amid concern that Europe’s debt crisis is worsening and American consumer confidence is slumping.
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The yield on the 10-year Irish bond surged 26 basis points to 6.29 percent in London. The spread with German bunds widened to as much as 389 basis points, or 3.89 percentage points, the most on record, according to Bloomberg generic data.
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Corporate creditworthiness in Europe is the best ever compared with governments, credit-default swap prices show, as companies cut debt while governments struggle with budget deficits.

The difference between the Markit iTraxx Europe Index of corporate credit-default swaps and the Markit iTraxx SovX Western Europe Index of contracts tied to government debt widened 1 basis point to a record 49, according to data from CMA and JPMorgan Chase & Co.

I don’t think there’s much need to worry. I think all those patriotic Americans who funded the IRA back in the eighties will be overjoyed to cut cheques to help out the old country.

Speaking of Europe, there’s a very good article on Greece, with the obligatory “It’s all Goldman Sachs’ fault” paragraph in the middle, by Michael Lewis, titled Beware of Greeks bearing bonds (hat tip: Financial Webring Forum).

A day of big volume on the Canadian preferred share market, with very strong returns: PerpetualDiscounts were up 45bp and FixedResets gained 12bp.

Nothing happened today.

Volume was very good on the Canadian preferred share market, while PerpetualDiscounts were up 9bp and FixedResets gained 10bp – although the vagaries of the index calculations meant that the reported yield for FixedResets crept up 2bp (returns are a mean; YTW is a median). MFC issues were, for a change, missing from both the performance and volume highlights.

OSFI has released its annual performance assessment:

A total of 49 one-on-one interviews were conducted among Chief Executive Officers (CEOs), Chief Financial Officers (CFOs), Chief Risk Officers (CROs), Chief Compliance Officers (CCOs), other senior executives, auditors and lawyers of deposit-taking institutions regulated by OSFI.

The regulated profess that the regulator is doing a great job!

Maple bonds issues are picking up:

Maple issuance may accelerate to C$6 billion ($5.8 billion) to C$8 billion next year, according to Greg McDonald, vice president and director of debt capital markets at Toronto- Dominion Bank’s TD Securities unit. The rest of this year may see an additional C$1 billion to C$1.5 billion in the Canadian dollar-denominated foreign debt, adding to the C$2.4 billion raised since January, he said.

Sales of Maple bonds, nicknamed after the leaf on the Canadian flag, surpassed the C$1.37 billion raised in all of 2009 in April, according to data compiled by Bloomberg. There haven’t been any Maple sales since July, when National Australia Bank Ltd. and Nederlandse Waterschapsbank NV raised C$600 million from two issues, as concern of a global economic slowdown drove investors to the refuge of government debt.

Would you like to diversify your fixed income portfolio with some Maples? Tough. The regulators say you’re too damn stupid for them to allow such a thing.

Subsidies to solar power lobbyists are continuing:

Prices for photovoltaic panels that convert sunlight into electricity may fall about 10 percent next year, less than analysts forecast, as European demand increases.

First-quarter prices will drop to an average of $1.65 a watt compared with $1.50 in the previous median estimate of five analysts surveyed by Bloomberg News. Analysts who contributed to the surveys included John Hardy at Gleacher & Co. in Connecticut and Sanjay Shrestha at Lazard Capital Markets. This year, contracts may average $1.80 to $1.85 a watt, they forecast.
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Developers have rushed to complete solar-energy projects ahead of planned declines in government incentives in Germany and Spain. At the same time, smaller markets expanded in France, the Czech Republic and the U.S. Increased orders will extend to 2011, when the analysts forecast sales to increase 20 percent.

Demand growth in Europe and North America will outpace higher production in Asia, Hardy and Shrestha said.

Evidence of currently reduced supply can be found in inventories and in some order terms.

Julie Williams, Chief Counsel for the OCC testifed on covered bonds:

Another important component of a statutory covered bond program is the types of assets eligible to collateralize the covered bonds. Typically, in Europe, covered bonds are associated with high quality assets comprised of residential or commercial mortgage loans and public-sector debt. While some have advocated a broad statutory spectrum of U.S. asset types, including credit card, student, small business, and auto loans, more recent proposals have tended to narrow the eligible asset classes.
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Various types of standards could be embodied in a covered bond regulatory framework. For example, all covered bonds, by asset class, should have minimum eligibility criteria setting asset quality standards to promote the inclusion of high quality assets in the cover pool. Most European jurisdictions prescribe asset quality criteria for the assets subject to the statutory covered bond program. Those standards in the U.S. could be set by statute or by the covered bond regulators through rulemaking. Given the likely detail involved, regulatory standards seem preferable.
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Covered bond legislation could authorize the covered bond regulators to establish minimum overcollateralization requirements for covered bonds backed by different eligible asset classes. As a related standard, legislation also could set forth a framework requiring each cover pool to satisfy an asset coverage test that assesses whether the minimum overcollateralization requirements are met, and obligates the issuer and an independent “Asset Monitor” to confirm on a periodic basis whether the asset coverage test is satisfied.
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Similar to the default situation approach, a statutory framework could create a
separate estate for the covered bond program similar to those in certain European jurisdictions. A recent legislative proposal creates a structure with the following general components when the FDIC is appointed as conservator or receiver for an insolvent issuer:

• Creation of a separate estate and provision to the FDIC of an exclusive right for 180 days to transfer the issuer’s covered bond program to another eligible issuer.
• A requirement that the FDIC as conservator or receiver, during the 180-day period, perform all monetary and nonmonetary obligations of the issuer until the FDIC completes the transfer of the covered bond program, the FDIC elects to repudiate its continuing obligations to perform, or the FDIC fails to cure a default (other than the issuer’s conservatorship or receivership).

US state pensions are in a bad way:

Less than half the 50 state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled for the Cities and Debt Briefing hosted by Bloomberg Link in New York today. Two years earlier, only 19 missed the mark. Illinois covered just 50.6 percent of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn’t be less than 80 percent.

Benefits paid by funds in at least 14 states equaled more than 10 percent of assets in the fiscal year, the figures show. In 2007, none exceeded the threshold. The growing burden prompted Colorado, Minnesota, Michigan and other states to trim benefits for millions of teachers and government workers. It also forced fund managers to keep money in short-term low-return investments to pay benefits, reducing chances pensions can earn their way back to financial health.

Expect to see more furious attacks on the reckless banks. Some misdirection is occurring already:

California sued Robert Rizzo, the ousted city manager of Bell who was paid almost $800,000 a year, and seven current and former officials, seeking the return of “excess salaries” and reductions in pension payouts.
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“We are filing our lawsuit on behalf of the public to recover the excess salaries that Bell officials awarded themselves and to ensure their future pensions are reduced to a reasonable amount,” state Attorney General Jerry Brown said in a statement.

But this is funny:

Fannie Mae agreed to finance loans to homebuyers putting as little as $1,000 down without getting the approval of the U.S. agency in charge of minimizing the costs of the mortgage company’s bailout.
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Fannie Mae is buying the Affordable Advantage loans from housing finance authorities in Massachusetts, Minnesota, Wisconsin and Idaho, Janis Smith, a spokeswoman, said today in a telephone interview. She declined to comment further.

The state housing authorities last year created the loan product aimed at first-time buyers, the New York Times reported Sept. 5. The mortgages come with 30-year fixed rates, require homeownership counseling, and are available to people with credit scores of at least 680 or 720, the paper said.

I love the bit about homeownership counselling. People only do naughty things because they don’t know better! That’s the only reason!

What makes this even funnier is some research from FRB-Richmond by Andra C. Ghent and Marianna Kudlyak, titled Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States with the abstract:

We analyze the impact of lender recourse on mortgage defaults theoretically and empirically across U.S. states. We study the effect of state laws regarding deficiency judgments in a model where lenders can use the threat of a deficiency judgment to deter default or to shorten the default process. Empirically, we find that recourse decreases the probability of default when there is a substantial likelihood that a borrower has negative home equity. We also find that, in states that allow deficiency judgments, defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu of foreclosure.

They classify Minnesota and Wisconsin, two of the states mentioned with respect to the $1,000-down programme, as being non-recourse!

Another day of good returns and good volume on the Canadian preferred share market, with PerpetualDiscounts gaining 21bp and FixedResets up 10bp. MFC issues continued to be prominently displayed in the volume and performance tables.

PerpetualDiscounts now yield 5.67%, equivalent to 7.94% interest at the standard equivalency actor of 1.4x. Long Corporates now yield 5.4%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 255bp, a sharp tightening from the 270bp reported on September 8.

The Treasury Market Practices Group has updated its Best Practices Guidelines. The TMPG is a relatively recent creation:

The TMPG was formed in February 2007 in order to encourage dialogue on market issues and to offer recommendations for best practices in the Treasury cash, repo, and related markets. This private-sector group is currently composed of representatives from dealers, buy-side firms, custodians, and other market participants. In light of its aforementioned expansion, the TMPG’s membership composition will likely evolve over time to ensure robust support of the group’s efforts across the Treasury, agency debt, and agency MBS markets.

Sure, a private-sector group. When push comes to shove, which dealer in Treasuries is going to piss off the New York Fed?

One of the “best practices” is highly peculiar and likely to be counter-productive:

Market participants should be responsible in quoting prices and should promote overall price transparency in the interdealer brokers’ market.

• Although legitimate price discovery activities are an integral part of the Treasury, agency debt, and agency MBS markets and should be encouraged, market participants should avoid pricing practices that do not have the objective of resulting in a transaction, or that otherwise result in market distortions.
• Price discovery relies on efficient price reporting and transparent markets. Market participants should not conduct trades through interdealer voice brokers with electronic trading screens without having a record of the transaction published on the screen at the time of the transaction. In addition, market participants should avoid conduct that deliberately seeks to evade regulatory reporting requirements or impedes market transparency efforts.

Ludicrous. Remember, kiddies, bond trading is a cooperative game. It’s not about winning, it’s about being good citizens.

Not sure what to make of this:

International Business Machines Corp. Chief Executive Officer Sam Palmisano, who will turn 60 next year, said the practice of the company’s CEOs retiring from the position at that age isn’t “cast in stone.”

Ain’t nuthin’ cast in stone. You can carve things in stone and you can cast them in iron, but I’ve never heard of casting stone.

Another good day on good volume for the Canadian preferred share market, with PerpetualDiscounts up 24bp and FixedResets gaining 9bp. The yield on latter index is inching slowly towards 3%…

MFC.PR.A continues to trade heavily, at about even yield with the recent bond issue.